Has Tech Run Its Course?

The following commentary comes from an independent investor or market observer as part of TheStreet's guest contributor program, which is separate from the company's news coverage.

By David Gillie

NEW YORK ( ETF Digest) -- The technology sector tends to perform best in the second half of the year -- largely due to back-to-school sales, holiday purchasing and corporate end-of-year expenditures.

This is certainly not to say that tech can't perform well in the first half of the year, but most likely it will not do much more than follow the overall market trend.

The S&P 500 is showing signs of exhaustion in its rally from December. All of the major tech-sector exchange-traded funds are overbought, more so than the S&P 500 ETF ( SPY).

You can't look at tech without looking at Apple ( AAPL).

After all, the iPhone and iPad maker has 15.7%, 17.7% and 15.3% weightings, respectively, in the Select Sector Tech SPDR ( XLK), iShares Dow U.S. Tech ( IYW), and PowerShares QQQ Trust 1 ( QQQ).

Yes, the QQQ, which tracks the Nasdaq 100, is that heavily weighted in AAPL, and nine of its top 10 holdings are in the tech sector. Therefore, it behooves us to take a quick look at AAPL before we examine our tech-sector ETF.

Most noteworthy is that AAPL recently reported a stellar quarter and experienced a gap up overnight from $420 to $450. However, it hasn't gained a new high since then and is looking back on a significant gap. We saw this same gap up in October, which was followed by selling. Additionally, AAPL is at the upper trend line resistance and 0.32% from the 52-week high resistance. With diminished volume, a breakout above these resistance levels is unlikely.

The Select Sector Tech SPDR is the most highly traded of the tech-sector ETFs.

The "top holdings" listed in the table above make up almost half of the holdings in XLK. All of these companies released earnings from Jan. 19 to Jan. 26, meaning there's little left in XLK for a fundamental upside surprise.

Turning to XLK's performance, its gains over the past month were only slightly larger than its gains for the entire year. Looking at the major stock market sectors (tech, financials, energy, consumer and materials) tech is the most overbought with the exception of materials (largely due to swings in precious metals). Tech is due for a pullback.

Nothing tells the story of supply and demand better than the Money Flow Index. Demand through January for XLK was at exceedingly high levels, but it has declined over the past several trading sessions.

Other indicators confirm the declining demand. The relative strength index hit its previous high before the August selloff and has begun to retreat.

Stochastics are rolling over from an extended overbought period. The MACD signal line is about to make a bearish crossover, and the histogram looks to be heading into negative territory. Our +/- directional indicator at the bottom of the chart shows positive direction has rolled over from a high and negative direction has just turned upward.

Everything on this chart shows a tiring trend about to decline. The question is how far.

We have an ascending triangle formation by the upper and lower trend lines. Generally, this indicates fewer and fewer sellers as the lower trend line ascends. Typically it's bullish.

From the lows in August, the lower trend line was established by the late September low. That lower trend line was tested again at the December low and proved true.

On the upper trend line established from the July highs we have only had one major test at the October highs.

Although, price may appear to have broken out of the ascending triangle pattern, we may not have a true breakout but rather an overextension based entirely on AAPL's earnings.

The pattern is still wide and typically would have another test of the lower trend line before a true breakout. Additionally, a true break would not have an array of declining indicators.

So, to answer the question of how far, a retest of the lower trend line would likely be just north of $25.25 (based on trend line trajectory and rate of change). That price level would also have the support of the 200-day moving average. A bounce off the lower trend line could spring XLK into a true breakout of the $26.50 level.

XLK isn't far away from its precrash, October 2007 high of $28. If anything is going to go into new realms of an all-time high, it will be tech. Keep your eye on Apple. As Apple goes, so goes tech.

At the time of publication, Gillie had no position in XLK.

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This commentary comes from an independent investor or market observer as part of TheStreet guest contributor program. The views expressed are those of the author and do not necessarily represent the views of TheStreet or its management.